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Microsoft, Yahoo announce search partnership

Microsoft Corp. has finally roped Yahoo
Inc. into an Internet search partnership, capping a convoluted
pursuit that dragged on for years and finally setting the stage for
the rivals to make an all-out assault against the dominance of
Google Inc.

The 10-year deal announced Wednesday gives Microsoft access to
the Internet's second-largest search engine audience, adding a
potentially potent weapon to the software maker's Internet arsenal
as it tries to better confront Google, the leader in online search
and advertising.

The extended reach will allow Microsoft to introduce its
recently upgraded search engine, called Bing, to more people. The
Redmond, Wash.-based software maker believes Bing is just as good,
if not better, than Google's search engine. Taking over the search
responsibilities on Yahoo's highly trafficked site gives Microsoft
a better chance to convert Web surfers who had been using Google by
force of habit.

"Microsoft and Yahoo know there's so much more that search
could be," said Microsoft Chief Executive Steve Ballmer. "This
agreement gives us the scale and resources to create the future of
search."

In return for turning over the keys to its search engine, Yahoo
will get to keep 88 percent of the revenue from all search ad sales
on its site for the first five years of the deal, and will have the
right to sell ads on some Microsoft sites.

Yahoo estimated the deal - which the companies hope to close
next year - will boost its annual operating profit by $500 million
and save the Sunnyvale, Calif.-based company about $275 million on
capital expenditures a year because it won't have to invest in its
own search technology.

Assuming it can pass antitrust scrutiny, the alliance could give
Yahoo a chance to recoup some of the money squandered in May 2008,
when it turned down a chance to sell the entire company to
Microsoft for $47.5 billion.

Yahoo's market value currently stands at about $24 billion.
Yahoo just came off a tough quarter in search advertising, with its
revenue in that niche falling 15 percent in the April-June period.

The two rivals began talking about a possible alliance as far
back as 2005 before Microsoft intensified the courtship with last
year's attempt to buy Yahoo.

It took Yahoo's current chief executive, Carol Bartz, just six
months to strike a deal with Microsoft - something that neither of
her predecessors, Terry Semel and Yahoo co-founder Jerry Yang,
seemed interested in doing.

Shortly after her arrival, Bartz made it clear she was willing
to farm out Yahoo's search engine for "boatloads of money" as
long as she as thought the company would still receive adequate
information about its users' interests.

"This agreement comes with boatloads of value for Yahoo, our
users, and the industry, and I believe it establishes the
foundation for a new era of Internet innovation and development,"
Bartz said Wednesday.

Under the agreement, Yahoo will have limited access to the data
on users' searches - which yield insights that can be used to pick
out ads more likely to pique a person's interest. The value of that
information is why Microsoft wants to process more search requests.

Like Yahoo, Microsoft has invested billions in its search
technology during the past decade, yet remained a distant third in
market share while its online losses piled up. The company's
Internet services division lost $2.3 billion in the fiscal year
ending in June, nearly doubling from the previous year.

Microsoft is counting on Bing, unveiled in early June, to turn
things around.

Bing has been getting mostly positive reviews and picking up
slightly more traffic with the help of a $100 million marketing
campaign. Analysts believe Bing's successful debut pushed Microsoft
to reopen negotiations so it could expose its search engine
improvements to a wider audience more quickly.

"The reason the deal happened now is the recent success of
Bing. I think it put pressure on Yahoo, as well as Yahoo not being
able to turn it around on its own," said Gartner Inc. analyst Neil
MacDonald.

Even with Yahoo's help, Microsoft still has its work cut out.
Combined, Microsoft and Yahoo have a 28 percent share of the
Internet search market in the United States, well behind Google's
65 percent, according to online measurement firm comScore Inc.
Google is even more dominant in the rest of the world, with a
global share of 67 percent compared to a combined 11 percent for
Microsoft and Yahoo.

Microsoft and Yahoo are likely to draw federal antitrust
scrutiny into whether the combination would have an adverse effect
on competition in the online ad market.

The U.S. Justice Department spent five months dissecting a
proposed search advertising partnership between Google and Yahoo
before concluding that it would give Google too much control over
the market.

Microsoft used its lobbying muscle to spearhead the campaign
against Google teaming up with Yahoo, so it wouldn't be a surprise
if Google turned the tables.

Under the Obama administration, the Justice Department is
promising to pore over technology deals far more rigorously than it
did when the proposed Google-Yahoo partnership came up.

Just getting Yahoo to succumb to its latest advance represents a
coup for Microsoft and the boisterous Ballmer, who were rebuffed
for so long.

Microsoft is doubling down on Internet search at the same time
Google is attacking Microsoft's bread-and-butter business of making
software for personal computers.

Google is working on a free operating system for inexpensive
personal computers in a move that could threaten Microsoft's
ubiquitous Windows franchise. If it gains traction, Google's
alternative, called Chrome OS, could divert some revenue from
Microsoft while the software maker is trying to grab more of the
money pouring into search advertising.

Chrome OS, though, isn't supposed to hit the market until the
second half of next year. That means Microsoft could get a head
start on Google in the duel to steal each other's financial
thunder.